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U.S. Industrial Production Flat in October -- Update

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November 16, 2016

By Ben Leubsdorf

WASHINGTON -- Industrial output was flat in October, as unusually warm weather depressed demand for home and office heating, but the U.S. manufacturing and mining sectors showed continued signs of stabilization.

Industrial production -- a measure of output from America's factories, power plants and mines -- was unchanged on a seasonally adjusted basis in October from the prior month, the Federal Reserve said Wednesday. Economists surveyed by The Wall Street Journal had expected a 0.2% increase.

Production fell 0.2% in September, revised down from an initially estimated 0.1% rise. Output had dropped 0.1% in August, revised up from an earlier estimate of a 0.5% decline.

Utilities production dropped sharply in October and September, offsetting modest gains in factory output. Mining production surged last month at the fastest pace in 2 1/2 years.

"Through the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led plunge in mining seems to have ended," said High Frequency Economics chief U.S. economist Jim O'Sullivan in a note to clients.

Total production fell 0.9% over the past year.

Capacity utilization, a gauge of slack in the industrial economy, ticked down 0.1 percentage point to 75.3% last month. Economists had expected an October reading of 75.5%.

In October, output rose 0.2% from the prior month in the manufacturing category, matching its September increase. Still, factory production was down 0.2% last month from a year earlier.

Utilities production was down 2.6% in October after falling 3% in September. The Fed said warmer-than-normal temperatures reduced the demand for heating. It was the warmest October since 1963 across the 48 contiguous U.S. states and the third-warmest October on record, according to the National Oceanic and Atmospheric Administration.

Mining production jumped 2.1% in October, the largest gain since March 2014. The Fed said gains for coal mining outweighed declines in oil and gas extraction. Still, mining output remained down 7% from a year earlier.

The U.S. industrial economy has appeared to stabilize in recent months following two years of pressure from a strong dollar, which dampened demand for U.S. exports, and low oil prices that squeezed the domestic energy industry.

The Institute for Supply Management's closely watched gauge of manufacturing activity signaled expansion in October for the second straight month, and the index has indicated rising factory activity in seven of the past eight months. In addition, the number of active U.S. oilrigs has been rising since the summer, according to oil-field services company Baker Hughes Inc.

"Oil and commodity prices have somewhat recovered, and our business in heavy-industry markets generally appears to have stabilized," said Blake Moret, chief executive at Rockwell Automation Inc., on a call with analysts last week. "Current forecasts call for improved global GDP and industrial production growth rates, as well as higher levels of global capital expenditures. We therefore expect improvement to continue."

But soft spots persist across the economy. Matt Farrell, chief executive at consumer-goods manufacturer Church & Dwight Co., told analysts earlier this month that while unemployment is steady, overall growth has been slow and families are facing rising health-care costs.

"I wouldn't say it's the best outlook for the consumer," he said.

Rising factory output "suggests that the sector is finally starting to see the benefits of the recent pick-up in global demand and the relative stability of the dollar since the start of the year," said Andrew Hunter, U.S. economist at Capital Economics, in a note to clients. "That said, the sharp rise in the dollar since Donald Trump's election victory last week may in time provide a new headwind, suggesting that any further recovery in manufacturing activity is likely to be gradual at best."

Broader U.S. economic growth picked up over the summer after a slow start to the year, with gross domestic product expanding at an inflation-adjusted annual rate of 2.9% in the third quarter, according to the Commerce Department.

Stronger growth in the second half of the year could boost the odds of a rate increase by the Federal Reserve at its Dec. 13-14 policy meeting, already seen as likely by private economic forecasters and financial markets. The central bank's benchmark short-term interest rate has been set at a range of 0.25% to 0.5% since last December.

"Absent significant negative economic news over the next month, the market's assessment of the likelihood of tightening in December seems plausible," Federal Reserve Bank of Boston President Eric Rosengren said Tuesday.